Roy Gish agreed to sell his 1,096–acre tract of land, complete with about 500 oil and gas wells, to Mohamed Saheid. Saheid faxed Gish an offer (“the Offer”) to buy the property for $4 million “for 100% ownership,” with $200,000 down and the remainder to be owner-financed over five years. On October 9, 2004, Saheid and Gish signed a one-page agreement (“the Agreement”) with respect to “Real Estate transaction involving 1,096 acres, including all oil and gas leases ….” The Agreement included the following provision:

Other: SELLER to give a best effort to deliver to BUYER the remaining 12.5% GISH family oil and gas lease holding.

On November 2, 2004, the parties executed an Act of Credit Sale and Assignment of Oil, Gas and Mineral Leases, Rights to Pipelines, Wells and Gathering Systems, and Equipment Leases (“the Act of Credit Sale”). The Act of Credit Sale recited that Gish and a certain trust conveyed “ALL THAT CERTAIN LOT OR PARCEL OF GROUND,” with all rights, ways, servitudes and component parts to Saheid. The instrument also included a special provision (“Paragraph K”) that stated:

K. The Trust and Purchaser acknowledge and agree that the Trust has represented to the Purchaser that the Trust is the sole and only owner of an undivided 87.5% interest in and to the leases assigned herein. Should that representation be incorrect, and should any claim be successfully asserted against the interest conveyed by the Trust to the Purchaser, then, and in that event, the purchase price attributable to said leases shall be reduced by the sum of [$400,000], without the necessity of the modification of this agreement and/or the execution of any other documents, provided, however, that any such claim be asserted on or before November 30, 2009.

Gish contended that he was the sole owner of the land and minerals, and that he had established the trust for tax purposes; he stated that the existence of the trust did not affect the 12.5% retention. He went on to argue that the parties intended for Gish to retain a 12.5% mineral interest in the property. At the trial court level, the parties stipulated that Saheid paid the 12.5% mineral royalty associated with this interest to Gish for almost four years.

When certain points of dispute arose, the parties executed an instrument entitled “Contract” on April 24, 2008, in which Saheid agreed to delete Paragraph K in its entirety from the Act of Credit Sale. The Contract also included the following provision (“Paragraph 2(d)”):

2. Buyer shall: * * *

d) Waive and relinquish all rights to reduce the purchase price based on any claim that the percentage interest in any land owners['] royalty interest or leases assigned to buyer were less than what has been represented by seller * * *. Buyer consents to and acknowledges that seller has and shall continue to withhold a 6.25% royalty for the Kennedy family and a 6.25% royalty to Ruth Sheppard et al, on the 1,096 acres.

Additionally, in February 2009, Gish and Saheid executed an Act of Correction which corrected property descriptions, but made no mention of the 12.5% reservation.

At trial, Saheid argued that because there was no express reservation in the instruments executed in connection with the sale, Gish was not entitled to the 12.5% interest. Gish, on the other hand, argued that the instruments reflected the intent to sell only an 87.5% interest. Allegedly, Saheid could not get financing for the purchase, so the parties settled on owner-financing with retention of a 12.5% mineral interest. However, Saheid claimed his original intention was to purchase all mineral rights with no reservation by Gish. Saheid argued that because the Correction was silent as to the 12.5% reservation, his original intent was clear.

In its ruling, the trial court cited the language in the Agreement (which referred to a 12.5% mineral interest “remaining”), the Act of Credit Sale (“an undivided 87.5% interest in and to the leases assigned herein”), and the Contract (“seller has and shall continue to withhold” two 6.25% shares). The court noted that the parties conceded that the Contract was “inartfully drafted” and that the “mineral interests were not reserved as they should have been.” Because of the ambiguity, the court accepted parol evidence. The court found that the parol evidence, along with the repeated mention of “12.5%” and “87.5%” in the instruments, and Saheid’s compliance with the 12.5% retention for several years, supported Gish’s argument that the intent of the parties was to convey only an 87.5% interest.

On appeal, Saheid argued that the trial court erred in allowing parol evidence because both the Act of Credit Sale and the Contract were clear and explicit, and lacked any language reserving a mineral interest. He went on to state that the four years of royalty payments were made in error. While the appellate court noted that the instruments lacked the standard phraseology of “grant, bargain, sell, convey,” it also noted that in the Contract, Saheid consented to and acknowledged the fact that Gish would withhold a 12.5% interest. Also, although it agreed with Saheid's position that the documents do not make an express reservation of mineral rights, the court held that the recurrent reference to a 12.5% interest—be it “remaining,” “withheld,” or inferred, along with Saheid paying Gish the mineral royalty for nearly four years, strongly suggested that the parties intended to make the reservation; therefore, Gish was entitled to the 12.5% mineral interest.

On March 23, 2004, plaintiffs and Long Petroleum, L.L.C. (“Long”) entered into an oil, gas and mineral lease which contained a habendum clause, a continuous drilling operations clause, a traditional Pugh clause, a “horizontal” Pugh clause, and an assignment clause. The continuous drilling operations clause provided:

If within ninety (90) days prior to the end of the primary term, Lessee should complete or abandon a well on the lands described above or on land pooled therewith, or if production previously secured should cease from any cause, this lease shall continue in force and effect to ninety (90) days from such completion or abandonment or cessation of production. If at the expiration of the primary term or at the expiration of the ninety (90) day period for in the preceding sentence, oil, gas, sulphur of other mineral is not being produced on said land or on land pooled therewith, but Lessee is then engaged in operations for drilling, completion or reworking thereof, or operations to achieve or restore production, or if production previously secured should cease from any cause after the expiration of the primary term, this lease shall remain in force so long thereafter as Lessee either (a) is engaged in operations for drilling, completion or reworking, or operations to achieve or restore production, with no cessation between operations or between such cessation of production and additional operations of more than ninety (90) consecutive day, or (b) is producing oil, gas, sulphur or other mineral from the said land hereunder or from land pooled therewith”(emphasis added).

The horizontal Pugh clause provided:

It is understood and agreed that this lease shall terminate at the expiration of the primary term as to all depths 100 feet below the deepest depth in any well drilled on the leased premises or on lands pooled therewith, subject however to the continuous drilling provisions contained in this lease.

The lease contained a primary term of three (3) years with an option to extend for an additional two (2) years. The option to extend was exercised and the primary term was extended to March 23, 2009. On August 1, 2008, Long assigned its rights, title and interest in the lease to Empress, L.L.C. (“Empress”) except Long reserved “all rights, title and interest in strata and depths from the surface to the base of the Cotton Valley formation.”

On January 16, 2009, a well (the “Edwards Well”) was spudded on lands unitized with the leased premises. This well was completed in June 2009 at 8,200 feet in the Hosston formation, and the well produced through December 31, 2011. Thereafter, within ninety (90) days of completion of the Edwards Well, Chesapeake spud a well (the “Yarbrough Well”) on September 21, 2009 on lands unitized with the leased premises with the purpose of producing from the Haynesville Zone. The Yarbrough Well was completed on June 30, 2010 and it was producing as of the date of this decision (April 8, 2016).

The plaintiffs believed that the lease had expired as to depths below to base of the Hosston formation on March 23, 2009 and, on March 5, 2012, requested that Long, Empress, Chesapeake and any other working interest owners execute a partial release as to “all depths 100 feet below the deepest depth in the Edwards No. 1 Well in accordance with [the provisions of the] Lease.” On March 15, 2012, defendants released the lease as to “all strata 100 [feet] below the stratigraphic equivalent of the Haynesville Shale formation” pursuant to the horizontal Pugh clause contained in the lease.

On August 14, 2012, plaintiffs filed suit, alleging that the lease had terminated as to all depths below the base of the Cotton Valley formation. The plaintiffs argued that the lease was horizontally divided as a result of the assignment of the lease as to depths below the base of the Cotton Valley formation and that as of March 23, 2009 (the expiration of the primary term) operations had not been conducted on depths below the base of the Cotton Valley formation sufficient to maintain the lease as to those deeper depths. On March 25, 2014, plaintiffs filed a motion for summary judgment; the defendants filed an opposition and a cross-motion. The district court granted the defendants’ motion for summary judgment, ruling that “although the Edwards Well ceased producing, the production from the Yarbrough Well continues to hold the entire lease.”

The Second Circuit affirmed the district court’s ruling, holding that the assignment of the lease as to depths below the base of the Cotton Valley formation from Long to Empress did not constitute a division of the lease; thus, operations and/or production from depths either above or below the Cotton Valley formation was sufficient to maintain the lea, at least until 90 days after completion of the Yarbrough Well. The court further held that because there was no evidence of record to indicate that there was a lapse in activity for any 90-day period, and because the Yarbrough Well was completed on June 30, 2010 without a gap of ninety (90) days since drilling operations commenced, the lease was maintained beyond the extended primary term by the “continuous drilling operation.” Specifically, the court stated that the “defendants were engaged in operations for drilling, completion or reworking, or [in] operations to achieve or restore production, with no cessation between operations or between such cessation of production and additional operations of more than ninety (90) consecutive days.”

Gabriel R. Ackal, Jr. is an associate with the law firm of Randazzo Giglio & Bailey LLC. Before practicing law, Gabe worked as an Independent Petroleum Landman in Louisiana and Texas. As a landman, Gabe has experience abstracting title and managing lease acquisition plays. His legal practice is primarily focused on Louisiana and Texas mineral and energy law, including rendering drill site and division order title opinions, as well as counseling on transactional matters, and providing nuts and bolts operational advice. Gabe is licensed to practice law in Louisiana (2010) and Texas (2013).